Economy in U.S. shrinks as defense spending slumps

The economy in the U.S. unexpectedly shrank in the fourth quarter, restrained by the biggest plunge in defense spending in four decades and dwindling inventory growth, as household purchases picked up.

Gross domestic product, the volume of all goods and services produced, dropped at a 0.1% annual rate, weaker than any economist forecast in a Bloomberg survey and the worst performance since the second quarter of 2009, when the world’s largest economy was still in the recession, Commerce Department figures showed today in Washington. A decline in government outlays and smaller gain in stockpiles subtracted a combined 2.6 percentage points from growth.

Bolstered by a drop in fuel prices and the biggest gain in incomes in four years, consumer spending accelerated as the biggest part of the economy overcame superstorm Sandy, a bitter presidential contest and Washington budget battles. The gain in spending may be difficult to sustain this quarter as a tax increase takes a bigger chunk from pay, one reason why Federal Reserve policy makers, meeting today, are projected to press on with plans to pump money into the world’s largest economy.

“The number isn’t as bad as it looks,” said Paul Edelstein, director of financial economics at IHS Global Insight in Lexington, Massachusetts, whose team projected a 0.3% gain, the lowest in the Bloomberg survey. “This really was a story about a payback in national defense spending. Consumer spending growth picked up, fixed investment was fairly strong.”

Shares Fall

Stock-index futures fell after the report. The contract on the Standard & Poor’s 500 Index maturing in March fell 0.2% to 1,502.3 at 8:54 a.m. in New York.

Another report today showed companies took on more workers than projected in January, showing the labor market kept making progress at the start of the year. The 192,000 increase in employment, the most since February 2012, followed a revised 185,000 gain in December, according to figures from the Roseland, New Jersey-based ADP Research Institute.

The median forecast of 83 economists surveyed by Bloomberg called for a 1.1% gain in GDP. Projections ranged from 0.3% to 2.1%. The GDP estimate is the first of three for the quarter, with the other releases scheduled for February and March when more information becomes available.

For all of 2012, the economy expanded 2.2% after a 1.8% increase in the prior year.